Wage compression refers to the situation where there is only a small difference in pay between employees regardless of their skills, experience or seniority. Wage compression most often occurs in the following two scenarios:
- A new employee is paid almost the same amount as an experienced employee for the same job.
- A lower-level employee is paid almost the same amount as a higher-level employee, like a manager.
In extreme cases, wage inversion, where newcomers are paid more than experienced workers, may occur. If left untreated, wage compression can become a significant internal equity issue and can even lead to pay inequities that violate equal pay laws.
Factors Leading to Wage Compression
Wage compression stems from a variety of causes, many of which are sustained over a few years. The most common causes include the following:
- Overlooked and outdated HR pay regulation policies that result in new hires being paid more than experienced workers
- Improper integration of employees and pay following a merger or acquisition
- Departmental differences in salary increases and adjustments, promotions and bonuses
- Outdated internal compensation structure that is out of alignment with the external market data
Consequences of Not Dealing with Wage Compression
Wage compression creates pay differentials that are too small to be considered equitable and can lead to widespread dissatisfaction among employees causing salary to change from a motivating to a “demotivating” force. This can impact productivity and lead to increased turnover, as well as decreased employee morale and potential resentment among co-workers.
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